Operational Risk Capital

Conlon, Thomas; Huan, Xing; Ongena, Steven

Operational Risk Capital

CEPR Discussion Paper No. DP15096

71 Pages Posted: 28 Jul 2020 Last revised: 16 Aug 2020

See all articles by Thomas Conlon

Xing Huan

University of Warwick - Accounting Group

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

There are 2 versions of this paper

Date Written: July 2020

Abstract

We study the response of banks to the introduction of a new capital requirement relating to operational risk. To isolate the effect of this new regulation on realized operational risk losses, we take advantage of the partial US implementation relative to full European adoption. Operational risk losses are reduced in treated banks. The extent of loss reduction depends upon the measurement approach used to calibrate operational risk capital requirements. Banks with low institutional ownership and those without binding regulatory capital constraints also present significant loss reduction. We link these findings to incentives for improved risk management and governance post treatment.

Keywords: Bank Regulation, Basel II, Measurement Approach, Monitoring, Operational Risk

JEL Classification: G21, G32

Suggested Citation: Suggested Citation

Conlon, Thomas and Huan, Xing and Ongena, Steven R. G., Operational Risk Capital (July 2020). CEPR Discussion Paper No. DP15096, Available at SSRN: https://ssrn.com/abstract=3661440